Electronic trading systems allow entry of one or more bids and/or offers for a particular tradable item, which in futures trading is referred to as a contract. The simplest possible futures contract is the outright contract defined by a product and a delivery period. It is also possible to define combination contracts, such as a spread contract, which is defined as the simultaneous purchase and sale of two or more tradable items, such as futures contracts for different months, different commodities, or different grades of the same commodity. The bid and offer components of a spread contract are termed the bid leg and the offer leg respectively.
Electronic trading systems accept bids and offers, whether for outright contracts or spreads, in the form of orders, also referred to as real orders because they consist of data entered by traders either directly or by computing devices under their control. A real order for an outright contract may be referred to as an “outright order” or simply as an “outright.” Real orders may be entered for any tradable item, such as outright contracts or combination contracts, in the system including, but not limited to, futures, options, inter-commodity spreads, intra-commodity spreads, futures strips, calendar spreads, butterfly spreads, condor spreads, crack spreads, straddles, and strangles.
Implied orders, unlike real orders, are orders which may not match against a single/direct counter order and may be identified and/or generated by the system on the behalf of traders who have entered real orders, i.e. an implied order may comprise one or more orders which, if entered, would allow the real orders to be executed. The trading system may identify, or otherwise recognize, implied orders, i.e. identify a real order entered by a trader which is counter to, whether intended by the trader or not, a combination of two or more other real orders, and/or generate an implied order, i.e. based on two or more real orders, generate and subsequently advertise for/solicit an order which would allow the two or more real orders to trade. Implied orders, however, are typically recognized/identified and/or generated generally with the purpose of increasing overall market liquidity, i.e. in situations where it is less likely a trader would actually enter such an order or where the trading system wishes to provide additional opportunities for matching trades in the markets for the particular real orders, and may be expressed, depending upon the application, in the form of the one or more requisite counter orders and/or in the form of one or more orders which would attract a trader to enter the one or more requisite counter orders. For example, an implied spread order may be derived from two real outright orders. In one application, trading systems identify and create, i.e. calculate, the “derived” or “implied” order and display, or otherwise advertise, the market that results from the creation of the implied order as a market that may be traded against in order to attract/solicit a trader to place the requisite counter order(s). If a trader enters an order to trade against this implied market, then the newly entered order and the real orders that were used to derive the implied market may be executed as matched trades. Alternatively, or in addition thereto, where markets already exist, trading systems may identify implied order opportunities, referred to simply as implied opportunities, e.g. an existing market, based on real orders, where an incoming real order may be identified and/or a resting order may be found which may satisfy the implied relationship between the real orders. For example, where two real orders imply a spread there between, there may already exist a market for the spread instrument where a suitable counter-order may be entered by a trader or is presently resting. Where the identification of an implied opportunity fails to find a suitable order, the trading system may then generate and list/advertise a suitable implied order to be traded against.
Implied orders frequently have better prices than the corresponding real orders in the same contract. This can occur when two or more traders incrementally improve their order prices in the hope of attracting a trade, since combining the small improvements from two or more real orders can result in a big improvement in their combination. In general, advertising implied orders at better prices will encourage traders to enter the opposing orders to trade with them while identifying implied opportunities among existing outright orders increases the number of matched trades, thereby improving market liquidity. The more implied order combinations that the Match Engine of a trading system can calculate or identify, the greater these benefits will be and the more the exchange will benefit from increased transaction volume.
Generating an implied market and/or identifying implied opportunities are complex processes because of, among other considerations, the large number of potential order combinations upon which implied orders may be based. For example, a single commodity product available in 72 different delivery months will have 72 possible outright contracts, each of which may have at least one resting buy order or resting sell order. Accordingly, there are 2556 (=(72*71)/2) potential spread contracts, noting that the buy/sell combination and sell/buy combination of any two outright contracts both correspond to the same spread contract. For a simple implied order where two real orders combine to form a third order, there are 5256 (=2*72+2*2556) choices of the order to imply and 71 (=72−1) ways to choose a combination of two orders implying any given third order, leading to 373,156 combinations overall. As the number and complexity of the contracts involved in implication gets larger, the number of possible combinations grows exponentially.
For these reasons, trading systems that derive implied orders or identify implied opportunities are often limited by computing capacity and speed. Conventional trading systems may not have an efficient method of determining all possible or best possible implied markets, especially when the order combinations involve more than a few orders.